Business context and reporting period
Fair Isaac Corporation (FICO) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2016. FICO provides analytics, software, data-management services and credit scores. Its reportable segments are Applications, Scores and Decision Management Software (DMS).
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2016 | Prior-year quarter |
|---|---|---|
| Revenue | $219.6 million | $200.1 million |
| Operating income / margin | $34.9 million / 15.9% | $30.8 million / 15.4% |
| Net income | $37.9 million | $19.2 million |
| Diluted EPS | $1.16 | $0.59 |
| Operating cash flow | $33.0 million | $50.6 million |
- Revenue rose 10%. Transactional and maintenance revenue was $153.7 million, professional services $43.5 million, and license revenue $22.4 million.
- Applications revenue increased 12% to $134.8 million; Scores increased 6% to $59.4 million; DMS increased 6% to $25.5 million.
- Operating margin improved modestly. Net income growth was substantially affected by a $17.3 million excess tax benefit on share-based awards recognized following early adoption of ASU 2016-09; the reported effective tax rate was a 32.3% benefit.
- Cash from operations declined $17.7 million year over year, primarily because of $20.0 million more in payments related to prior-year accrued incentives. Investing cash outflow was $4.3 million; financing cash outflow was $13.0 million. Cash increased $12.2 million to $88.1 million.
- At quarter-end, total debt was $620.7 million, comprising $102.0 million of current maturities and $518.7 million of long-term debt. This included $305.0 million drawn on a $400 million revolving facility at a weighted-average 1.85% rate and $315.7 million carrying value of senior notes. FICO reported compliance with debt covenants.
- Current assets were $284.7 million and current liabilities $249.7 million. FICO said cash, available revolver capacity and anticipated operating cash flows were expected to cover requirements, including a $72.0 million senior-note principal payment due July 2017.
Changes, outlook and risks
- Scores operating income rose 10% to $46.1 million, with segment margin increasing to 78% from 75%. Applications operating income increased 7% to $35.0 million. DMS operating loss widened to $3.6 million from $1.4 million as FICO invested in sales distribution, services delivery and cloud infrastructure.
- Bookings were $96.4 million versus $86.4 million; bookings over $1 million numbered 13 versus 10. Management reported bookings growth of 11% in Applications and 31% in DMS. Bookings are estimates of contracted potential revenue, not recognized revenue, and actual volumes and timing may differ.
- Management expected cost of revenues as a percentage of revenue to remain consistent with or slightly above the quarter’s level over the next several quarters. It expected R&D and SG&A percentages to remain consistent, and net interest expense to be consistent with or lower than the quarter’s level.
- FICO repurchased 258,176 shares for $30.4 million and had $199.6 million remaining under its authorization. It paid a $0.02-per-share quarterly dividend; future dividends remain subject to board decisions.
- Key exposures include reliance on banking and consumer-credit markets (74% of quarterly revenue), international operations (34%), and credit-reporting-agency relationships; Equifax, TransUnion and Experian collectively accounted for approximately 18% of revenue. The filing also identifies competition, regulatory and privacy changes, cybersecurity and service interruptions, customer concentration, and execution of the Decision Management strategy as risks.
- The notes disclose customer payment disputes, former-employee claims and other ordinary-course matters; FICO stated it had no material aggregate exposure for reasonably possible legal losses. No separate legal proceeding was reported as applicable. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- FICO planned to adopt the new revenue-recognition standard in fiscal Q1 2019 using retrospective transition and was evaluating its effects; it was also evaluating the impact and timing of other pending accounting standards.
Important facts for investors to verify
- How much of the increase in net income and EPS reflects the $17.3 million share-based compensation tax benefit, and what are normalized earnings and tax-rate expectations?
- Whether bookings convert to recognized revenue as estimated, particularly given variable transaction volumes and long sales cycles.
- Whether DMS investment produces improved revenue growth and operating margins, and whether management’s expense outlook holds.
- Cash generation and refinancing or repayment capacity ahead of the $72.0 million July 2017 note payment; also monitor revolver borrowings and covenant headroom.
- Developments in customer, credit-bureau and distributor concentration, regulatory/privacy requirements, cybersecurity, and disclosed disputes or contingencies.